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Islamic Contract – Bay’ al-Istijrār: Istijrār With Upfront Payment
1. Definition of Istijrār With Upfront Payment
Explanation
This type of istijrār involves:
the buyer paying money upfront to the seller for a specified quantity of goods that will be supplied gradually in stages over time.
Instead of:
Simple Example
A restaurant pays:
✅ Istijrār with upfront payment.
2. Scholarly Views on Istijrār With Upfront Payment
Majority of Scholars
The majority of scholars:
✅ permit this arrangement,
although they differ regarding:
the fiqh characterization (takyīf fiqhī) of the contract.
Some classify it as:
Shāfi‘ī School
The Shāfi‘ī jurists:
❌ do not permit this form of istijrār.
Why?
Because:
3. SAC-BNM Approval on Istijrār Trade Financing
SAC-BNM Resolution
The:
Shariah Advisory Council of Bank Negara Malaysia (SAC-BNM)
at its:
194th meeting on 25 June 2019
approved:
a proposed import financing structure based on bay’ al-istijrār.
This approval was specifically for:
4. Structure of Istijrār Import Financing
The structure generally involves:
Chronological Flow of Istijrār Import Financing
STEP 1 — Customer Wants to Import Goods
A Malaysian importer wishes to import:
RM2,000,000
The customer requests:
STEP 2 — Customer Appointed as Agent
The Islamic bank appoints:
the importer/customer as purchasing agent (wakīl).
The customer now acts:
SAC-BNM Requirement
The facility agreement must clearly specify:
the importer’s responsibility as purchasing agent.
STEP 3 — Customer Purchases Goods for Bank
As agent:
✅ goods are purchased for the bank,
not yet for customer personally.
STEP 4 — Islamic Bank Becomes Owner of Goods
Once purchase completed:
✅ ownership transfers to Islamic bank.
Thus:
STEP 5 — Exporter Ships Goods
The exporter ships:
STEP 6 — Customer Receives Goods/Documents
The imported goods and/or shipping documents arrive.
STEP 7 — Customer Purchases Goods From Islamic Bank
After agency role completed,
the customer now enters:
separate purchase transaction with the Islamic bank.
This is important because:
SAC-BNM Requirement
The IFI must ensure:
proper sequencing of transactions.
Meaning:
STEP 8 — Customer Pays Bank
The customer pays:
Example With Figures
Import Cost Paid by Islamic Bank
RM2,000,000
Selling Price to Customer
RM2,300,000
Bank’s Profit
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
5. Why Proper Sequencing Is Important
Incorrect Structure
If customer:
Correct Structure
Sequence Must Be:
6. Risks and Liabilities
The agreement must clearly determine:
Example
Before Customer Purchases From Bank
✅ Bank bears ownership risk.
After Customer Purchases From Bank
✅ Customer bears ownership risk.
7. Why SAC-BNM Allowed This Structure
SAC-BNM approved this structure because:
the approval is confined specifically to the proposed trade finance structure.
Important Sharī‘ah Principle
Istijrār financing is permissible only if:
✅ proper ownership transfer occurs;
✅ agency and sale contracts are separated;
✅ sequencing is properly maintained;
✅ ownership risks are genuinely borne by the correct party.
Otherwise:
❌ the arrangement may resemble conventional interest-based financing.
1. Definition of Istijrār With Upfront Payment
Explanation
This type of istijrār involves:
the buyer paying money upfront to the seller for a specified quantity of goods that will be supplied gradually in stages over time.
Instead of:
- immediate full delivery,
- withdrawn progressively according to need.
Simple Example
A restaurant pays:
- RM100,000 upfront
to a food supplier for: - monthly supply of chicken over 1 year.
- delivers portions gradually every month.
✅ Istijrār with upfront payment.
2. Scholarly Views on Istijrār With Upfront Payment
Majority of Scholars
The majority of scholars:
✅ permit this arrangement,
although they differ regarding:
the fiqh characterization (takyīf fiqhī) of the contract.
Some classify it as:
- salam-like arrangement;
- continuous supply sale;
- hybrid contractual structure.
Shāfi‘ī School
The Shāfi‘ī jurists:
❌ do not permit this form of istijrār.
Why?
Because:
- payment occurs upfront;
- goods are delivered gradually later;
- uncertainty may arise regarding staged delivery.
3. SAC-BNM Approval on Istijrār Trade Financing
SAC-BNM Resolution
The:
Shariah Advisory Council of Bank Negara Malaysia (SAC-BNM)
at its:
194th meeting on 25 June 2019
approved:
a proposed import financing structure based on bay’ al-istijrār.
This approval was specifically for:
- Islamic trade finance facilities;
- Islamic letter of credit financing.
4. Structure of Istijrār Import Financing
The structure generally involves:
- Islamic Financial Institution (IFI);
- importer/customer;
- exporter/supplier.
Chronological Flow of Istijrār Import Financing
STEP 1 — Customer Wants to Import Goods
A Malaysian importer wishes to import:
- industrial machinery from Germany.
RM2,000,000
The customer requests:
- Islamic trade financing facility.
STEP 2 — Customer Appointed as Agent
The Islamic bank appoints:
the importer/customer as purchasing agent (wakīl).
The customer now acts:
- on behalf of the Islamic bank
to purchase goods.
SAC-BNM Requirement
The facility agreement must clearly specify:
the importer’s responsibility as purchasing agent.
STEP 3 — Customer Purchases Goods for Bank
As agent:
- the importer executes purchase transaction with exporter
on behalf of: - Islamic bank.
✅ goods are purchased for the bank,
not yet for customer personally.
STEP 4 — Islamic Bank Becomes Owner of Goods
Once purchase completed:
✅ ownership transfers to Islamic bank.
Thus:
- the bank bears ownership risk at this stage.
STEP 5 — Exporter Ships Goods
The exporter ships:
- industrial machinery.
STEP 6 — Customer Receives Goods/Documents
The imported goods and/or shipping documents arrive.
STEP 7 — Customer Purchases Goods From Islamic Bank
After agency role completed,
the customer now enters:
separate purchase transaction with the Islamic bank.
This is important because:
- agency role must finish first;
- customer cannot simultaneously act as:
- purchasing agent;
- purchaser.
SAC-BNM Requirement
The IFI must ensure:
proper sequencing of transactions.
Meaning:
- agency purchase first;
- customer purchase from bank second.
STEP 8 — Customer Pays Bank
The customer pays:
- agreed financing price;
- either deferred or instalment basis.
Example With Figures
Import Cost Paid by Islamic Bank
RM2,000,000
Selling Price to Customer
RM2,300,000
Bank’s Profit
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
2{,}300{,}000 - 2{,}000{,}000 = 300{,}000
5. Why Proper Sequencing Is Important
Incorrect Structure
If customer:
- purchases goods before agency role completed,
- contracts may overlap improperly;
- ownership transfer becomes unclear;
- Sharī‘ah issues may arise.
Correct Structure
Sequence Must Be:
- Customer acts as agent for bank.
- Bank acquires ownership.
- Customer later buys goods from bank.
6. Risks and Liabilities
The agreement must clearly determine:
- who bears ownership risk;
- liabilities at each stage.
Example
Before Customer Purchases From Bank
✅ Bank bears ownership risk.
After Customer Purchases From Bank
✅ Customer bears ownership risk.
7. Why SAC-BNM Allowed This Structure
SAC-BNM approved this structure because:
- modern trade finance requires practical import financing solutions;
- continuous supply financing is commercially needed;
- the structure facilitates Sharī‘ah-compliant international trade.
the approval is confined specifically to the proposed trade finance structure.
Important Sharī‘ah Principle
Istijrār financing is permissible only if:
✅ proper ownership transfer occurs;
✅ agency and sale contracts are separated;
✅ sequencing is properly maintained;
✅ ownership risks are genuinely borne by the correct party.
Otherwise:
❌ the arrangement may resemble conventional interest-based financing.
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